Caution needed on commission ban inquiry

The Federal Government’s announcement that it is considering extending its ban on commissions to include the risk insurance industry has reignited debate on the likely effects of such a change.

Considering that the initial Future of Financial Advice reforms initially excluded risk insurance from the ban on commissions in recognition that “insurance has different features from investment products”, it is now up to the Government to decide whether the ban would benefit or burden the industry.

Financial Services Minister Chris Bowen has already outlined his concerns that a fee-for-service model may impact the affordability of insurance and exacerbate Australia’s underinsurance problem.

He has also ensured all parties understand he has an open mind on the issue. That has been some relief to intermediaries’ representative groups, especially in general insurance.

But like it or not, the issue is going to get yet another hefty examination, and the conclusion can’t be regarded as cut and dried. Since the last major inquiry into how risk insurance commissions are applied in the local market – following controversies over contingent commissions in New York – we’ve had a change of federal government. ALP governments tend to give the opinions of consumer groups rather more weight than their conservative counterparts.

And consumer groups aren’t onside at all with the “everything’s okay” point of view. They say risk insurance shouldn’t be treated differently to other financial services products and that commissions of any kind should be banned.

They say a ban would not only remove a very real conflict of interest but could also lower premiums.

“I do think commission payments influence the advice that brokers give to their clients. Even if they didn’t influence the advice about what sort of cover the consumer needed, they would influence the sorts of products put forward to satisfy those needs.

“One of the things that has been said about scrapping commissions in the financial advice area is that it will actually ultimately lead to the price of financial advice coming down, so you will pay for it upfront but it will actually be cheaper and more accessible over time. We think the same thing will happen with insurance.

“More importantly, you pay for the price of commissions in the premiums that you pay. So I would suggest that if people are not taking out insurance because of affordability concerns, it is not because they don’t want to pay for the advice – it’s because they don’t want to pay for the premiums over many, many years.”

Lawyer Denis Nelthorpe – a consumer advocate with considerable influence – agrees that insurance commissions have to go, to ensure consumers get the best product for their money. He has welcomed the Government’s about-face.

“My view is that if you allow commission-based sales you are inviting a conflict of interest,” he told insuranceNEWS.com.au.

“I think the Government probably had been somehow convinced that you don’t get the same behaviour in terms of self-interest on life insurance-type products. I think the Government has since realised that that is a very naive proposition.”

Comments from Mr Bowen last week suggest that the Government is taking a cautious approach to the issue and, while concerned by underinsurance, is also aware that the new commission reforms will have to be watertight.

“There are good arguments validly made on both sides of this discussion about whether risk insurance should have its commissions banned,” Mr Bowen said.

“We also need to ensure that were we to exempt risk insurance in the ban on commissions, we didn’t allow some sort of backdoor mechanism to allow commissions to continue to exist for financial advice more generally.

“I have a genuinely open mind about this. We’ll need to act in the national interest. I don’t yet feel I have enough information to make that decision.”

With such a significant decision up in the air, there is no doubt that the upcoming consultation process will be very important to risk insurance, and particularly intermediaries. There’s a great deal at stake, and it’s likely to settle this issue once and for all. It would be wise to take this inquiry very seriously indeed.